A Brief Look at Refund of ITC Where Refund of IGST Paid on Zero-rated Supplies is Claimed

[GURJIT BHULLAR]

ITC balance in Credit Ledger is a pool. Once a part of this pool then not to be sorted out to identify each contribution to this pool. An exception to this is the method adopted in Rule 42 and 43 for reversal of ITC. The Refund formulae and tables are not in the exception part.

Attempt has been made to keep the process simple for determination of refundable amount. This simplicity is sought by not resorting to identify each and every credit in relation to a corresponding outward supply for the purpose of allowing or denying the refund. Rather the approach is to allow refund by adopting the proportion method. Broadly stated, to grant refund of ITC in ratio of the supply for which ITC is refundable to the total outward supply. The cost of this simplification is - Taxpayer wins some loses some, Revenue wins some loses some.

A look now at the third proviso to Sec 54(3) of the CGST Act –

“Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”

This proviso in the Act denies refund of ITC if supplier claims refund of the IGST paid on such supplies. It states that in case of supplies with payment of IGST the ITC refund is not allowed.

Taking a period where the taxpayer has made only zero-rated supplies on which IGST has been paid and has not made any other supplies. Then in view of the above proviso he is not eligible for any refund of ITC, even if some ITC may remain unutilized and has accumulated. Strictly speaking, in such case, the above proviso defeats the concept of zero-rating viz. no burden of tax on such supplies.

It cannot be wished away that accumulated ITC if it is consequent to zero-rated supplies needs to be refunded, to follow the concept of zero-rating. Not allowing such refund is a lose-lose, rather than win some lose some, situation for the taxpayer.

Taking the situation further, if within the same period the taxpayer has also made supplies on which ITC is refundable, say zero-rated supply under LUT without payment of tax. ITC remains unutilized and has accumulated. In the pool of unutilized accumulated ITC, a part of unutilized ITC relates to the zero-rated supplies on which IGST has been paid and other part relates to zero-rated supply under LUT without payment of tax.

Now comes the part about calculating the refundable ITC. Does the pool need churning to segregate and identify individually each ITC and relate the same to either one of the type of outward supply.

One view can be that per the simplified approach of calculating refund as given in Rules, the total ITC is sliced to refundable ITC by the ratio of formula. Whereby, Net ITC * Zero-rated supply with LUT/Adjusted total turnover = eligible refund. Since the total turnover comprises of the turnover of zero-rated supply with payment of IGST thus proportionate ITC becomes refundable. Or conversely proportionate ITC is not refundable. Simple.

Any other view will obviously lead to complexities in calculating the refundable amount.

On the other hand, the proviso states that no refund of ITC shall be allowed if refund of IGST has been claimed on any supply/supplies. The point is whether the formula as given in the Rules fulfills the denial of refund of such ITC, as specified in the Act. Of course the absolute denial of such ITC, though prohibited by Act, is not achievable by applying the formula.

Rule 89(4) broadly mentions that ‘in accordance with the provisions of section 16(3) of the IGST Act, refund of input tax credit shall be granted as per the following formula’. And 16(3) of the IGST Act provides for eligibility of refund of ITC in case of zero-rated supplies in accordance with the provisions of Sec 54 of CGST Act or Rules thereunder. In Rule 89(4) a specific mention about in compliance or in accordance with provisions of Sec 54(3) would certainly have helped in placing the issue beyond doubt.

Before concluding giving thought to a little matter. Is the refund amount arrived at by the formula the final refundable amount? Unchangeable. No, answer lies first in the Rule itself wherein such “Refund amount" means the maximum refund that is admissible. Meaning thereby that the amount arrived at is the maximum amount refundable. Not a paisa more than this amount is to be refunded. Maximum refund admissible though denotes, by itself, that the actual refund may be lower.

One reason for a lower amount could be that the full amount of maximum refund is not available in Credit Ledger. Some part of ITC has been utilized, resulting in a lower available balance in Credit Ledger. That means a part of amount though eligible cannot be granted as refund because it is no more an accumulated ITC.

Can the specific denial, in the third proviso to section 54(3) of the CGST Act, of refund of ITC if supplier claims refund of the IGST paid on such supplies also be a possible or plausible reason to reduce the maximum refund that is admissible? A position may be taken that the word of law is indicating so.

As said earlier, adhering to this reasoning would obviously lead to much complexities in calculating the refundable amount.

The practical approach in spirit of the refund provisions implores to avoid this inference. A small clarification would go a long way to avoid any possible conflict.

In fact, the spirit of the concept of zero-rating may be well served by absence of the restriction placed by the said proviso. And an accompanied amendment in the formula as contained in the Rules.

By CA Gurjit Singh Bhullar